UK and International Tax news

FTT Decision In Interest Free Loan Arrangement Case

Monday 18th November 2013

The FTT has recently published its decision in the case of Versteegh Ltd, Nestron Ltd, Spritebeam Ltd and Prowting Ltd v CIR which involved a loan structured to provide a return in the form of preference shares issued by the borrower not to the lender but to another group company.

A number of groups of companies had entered into a scheme designed to achieve a corporation tax deduction in one group company for the costs of an intragroup borrowing, but without any concomitant taxable accrual or receipt in the group company making the loan, or in any other group company.

HMRC sought to challenge the effectiveness of the scheme on a number of grounds and the appeals to the FTT were lead cases for those groups who have undertaken the scheme. In particular, HMRC challenged the effectiveness of the scheme on the following issues:

(1) Was the lender taxable under the loan relationship rules even though the accounting rules did not require the recognition of any income resulting from the loan, or under s.786 TA88;

(2) Was the share recipient taxable on its receipt of shares under the old Sch D Case VI rules, and

(3) Did the unallowable purposes rule in para 13 Sch 9 of FA96 result in a disallowance of the borrower’s debit in respect of the issue of the shares.

In their 48 page ruling, the FTT held in favour of the taxpayers in respect of issues 1 and 3 but found for HMRC on the taxation of the share receipt [issue 2].